Pitching for self-reliance in defence production and aiming to cut expensive import of equipment, the Narendra Modi government is set to do away with the requirement of industrial licensing for manufacture of all defence products except 16 items in a negative list.
This would be another milestone in the development of the domestic arms and related equipment industry where the private sector was allowed entry through a licensing policy in May 2001 by the Atal Bihari Vajpayee government.
Items that would now be de-licensed as per a note prepared by the defence ministry and currently in inter-ministerial circulation include equipment used in rescue operations, night vision and surveillance equipment, solutions for personal armour, vehicle armour, parts of equipment, castings, forgings and specified test equipment. Also, dual-use items having military as well as civilian applications other than those included in the negative list will not require industrial licensing.
Sources said the proposed de-licensing, coming close on the heels of a recent order making e-procurement mandatory for defence purchases above R10 lakh, is expected to curb corruption and benefit private-sector manufacturers in a sector where state-run firms still have a dominant presence. The latest move, they added, would make it easier for the private sector to set up business in defence production as securing a licence in the strategically important sector is considered a major hurdle.
The move comes along with the Modi governmentís plan to allow 100% foreign direct investment in the defence production sector, a significant step further from the current regime where FDI is generally limited at 26%. Effective April 2014, FDI above 26% can be allowed with the approval of the Cabinet Committee on Security if modern and state-of-the-art technology can be accessed by the Indian entity, but this policy announced during the last leg of the UPA government hasnít yet been invoked.
Indiaís defence hardware requirement is heavily dependent on imports, which accounts for about 70% of its total procurement, with the remaining sourced primarily from domestic state-owned enterprises.
Private firms like Tata Advanced Systems, Larsen & Toubro, Kirloskar Brothers, Mahindra Defence Systems and Ashok Leyland account for about 9% of the direct procurement by the government.
Indiaís defence budget has been rising relentlessly in the past decade even as the modernisation needs have not been fully met. This has partly been due to the incapacity of the indigenous sector